An extremist, not a fanatic

September 30, 2009

Why are the great and the good of the arts world - including Martin Scorsese, Whoopi Goldberg and Salman Rushdie - calling for the release of Roman Polanski? I suspect there are some inferential errors at work. Here are five possibilities:1. The halo effect. It’s common to believe that someone who is good in one regard is good in all. So the belief that Polanski is a good film-maker leads people to think he is a good man. Investors in Bernard Madoff’s funds might have made a similar error - they inferred from evidence that he was “a great philanthropist, a pillar of the community” that he was trustworthy. 2. Ingroup bias. Kieran has called it right: a lot of the defences of Polanski are no more than “He’s one of us.“ But it’s a common tendency for us to be favourably disposed to people like ourselves. For example:

In response to a petition being circulated to evict the family one of the Simmonses’ [the family accused of harassing Fiona Pilkington to death] neighbours published a letter saying that they were superb neighbours and that the children were so trusted that they were given keys to her house to look after the cats.

3. “The innocent victim” effect. Taking his life as a whole, Polanski is more sinned against than sinning. Because we tend to associate the word “victim” with the word “innocent”, we under-estimate the possibility that victims can be bad people too. 4. The fundamental attribution error. Having decided that Polanski is a good man, people refuse to believe that he can have done a bad thing: “It wasn’t rape-rape” says Whoopi Goldberg.The error here is to exaggerate the extent to which character determines actions, and to fail to see that good people can do bad things under certain circumstances. It’s in this context that Polanski’s being a victim of the Holocaust is ironic. That episode teaches us that ordinary people can do atrocious things. My personal way of trying to correct for this error is to regard people not as “characters”, but as bell curves; we see only a sample drawn from such a curve, and we shouldn‘t draw inferences about the whole curve from one sample. For this reason, I would no more call Polanski a rapist than call Tony Blair a guitarist.5. Misperceiving punishment. It’s common to regard punishment as a judgment upon an individual. Polanksi‘s defenders recoil from doing this. But we shouldn’t see imprisonment in such morally-laden terms. Instead, we should take the title of Gneezy’s and Rustichini’s famous paper (pdf), “A fine is a price” one step further; a prison sentence is just a price. Polanski’s supporters expect him to pay for his suits or his dinners - so why shouldn‘t they expect him to pay for his rape? I don't say this to criticize Polanski’s supporters - loyalty to one’s friends is to be admired. I do so to point out the ubiquity of cognitive biases.

September 29, 2009

According to a recent poll, half of the public believe there is no need to cut spending to reduce public debt. Today’s figures from the Bank of England suggest they might be right. They show that individuals borrowed money in August (pdf), suggesting that July’s repayment was a one-off, and that non-financial firms have begun to borrow from banks after paying back money for months.This matters for the public finances for a simple reason - across the whole economy (which includes foreigners), net borrowing must equal net lending by definition. So if firms and households borrow more, government will borrow less.

My chart, taken from table I of today’s GDP data, shows this. It shows that there is an almost perfect negative correlation (minus 0.93, R-squared = 86.2%) between private sector net borrowing and government net borrowing*; these numbers refer to Q2, so take no account of today‘s data. This tells us that government borrowing is largely a result of the credit crunch. In forcing the private sector to become a big net lender, this has compelled government to borrow a lot. This means that if the private sector starts borrowing again - as today‘s figures suggest they are - government borrowing will fall almost one-for-one. If so, the public finances might improve quicker than expected in which case the need for spending cuts will be less.You might object that this is too optimistic. The cliché “you can’t read too much into one month’s figures” is a cliché precisely because it’s true. We are a long way from the normal level of private borrowing required to get government borrowing down to its usual levels. And in fact today’s numbers show that financial companies are repaying debt. These objections are valid. But they hardly produce an urgent case for cutting government spending. Doing this at a time when the private sector is unable or unwilling to borrow and spend is a recipe for depressing demand.The message is simple. Looking at government borrowing properly - that is, as the counterpart of private lending - suggests either that spending cuts might be unnecessary, or that they could be downright damaging.This isn’t to say that spending cuts will be unnecessary in all circumstances. We might need them to pacify the bond market. But because gilt yields are so low now - even in the face of the worst news about public borrowing - this is only a plan B. * The correlation is not minus one because I’ve ignored foreigners’ net lending. But the fact that the correlation is so strong shows that this omission makes little difference to my story.

September 28, 2009

It’s insufficiently appreciated that Come Dine with Me raises some profound issues in economics. Here are three:1. The importance of norms of fairness. The format of CDWM is simple. There are four people. Each hosts a dinner party for the other three. The guests score their host out of 10. The person with the highest score wins £1000. In this game, the optimum strategy for a guest is to score their hosts zero. This would mean the maximum score one’s rival hosts could make would be 20, which in a normal game would not usually be sufficient to win. So, if your three rivals play normally, scoring them zero greatly increases your chances of winning. If everyone knows this, we end up in a Nash equilibrium in which everyone scores zero; this is a one-shot game with scores revealed only after all four dinner parties, so tit-fot-tat doesn‘t apply.But this never happens. Even contestants who claim to want to win score their rivals reasonably. This suggests that norms of fairness overwhelm selfish optimization*.This raises the question, though: why is CDWM so different from Golden Balls - which is a pure Prisoners‘ Dilemma game - where we often see the selfish defect-defect strategy? The answer, I suspect, lies in the abundance effect. The difference between CDWM and Golden Balls is that in the latter money is much more salient. And research (pdf) shows that, the more people think about money, the more selfish they behave. The lesson is that context - not just incentives - matter. 2. The trickiness of inter-personal comparisons of utility. Let’s assume that games are scored purely according to perceptions of fairness. It doesn’t follow that everyone has an equal chance. Take, for example, two people. One is a gourmand, used to fine dining and the highest standards. The other has low expectations. Our gourmand might well score a fair-to-middling dinner much lower than the diner with low standards. On this account the gourmand would have more chance of winning than the other diner, even if both are cooks of equal ability. One might question the justice of this. More importantly, it raises the question: why should expressed preferences carry so much weight when they can be heavily affected by factors which should perhaps be irrelevant?3. The importance of ordering. The four people are strangers. This means the first host is in a different position to the last host. The first is likely to judged heavily on his food, as the guests barely know him. But later hosts are more likely to be judged on personality as well, as by then the four have gotten to know each other. This can cause diners to regret their earlier scores. We saw this last night, when Rachel said that, had show known how big an arse Stuart - the first host - was, she would not have scored him so highly. This poses a big problem for conventional rational choice economics. It typically takes preferences as given, and revealed by choice. However, CDWM shows that preferences are sensitive to the order in which options appear. For Rachel, the choice: “score Stuart, then score Josh“ yielded a different result than “score Josh, then score Stuart“ would have done. I suspect this is related to Allais’s paradox.So, CDWM raises important issues about the nature of rationality and preferences. Watched even in narrow economists' terms, it is much more interesting than politicians' waffle about the crisis. * Or it could be that the producers just tell the contestants not to play silly buggers.

September 27, 2009

It’s reported that Gordon Brown wants to introduce a law committing future governments to reduce borrowing*. This is both very stupid and very cunning.As macroeconomic policy, it scales the peaks of imbecility. To see why, imagine the following (which shouldn’t be difficult, as it’s what’s happened in the last two years). The domestic private sector decides to save more and/or invest less. This might be because job insecurity causes households to want to save more (pdf), or because banks are loath to lend, or because firms’ don’t need to invest as they have huge spare capacity. Whatever the motive, their desired financial surplus - their net lending, the gap between savings and investment - rises. What happens? In part, these plans will be frustrated. As some people cut their spending, others’ incomes fall and these are unable to save more; this is the paradox of thrift.However, insofar as domestic private net lending does rise, one of two things must happen. These are mathematical necessities, because across the whole economy, net lending must equal net borrowing.The first possibility is that the current account deficit - which is foreigners’ net lending to the UK - falls.The second possibility is that government borrowing rises. Note that both of these happen because spending falls; this reduces both imports and tax revenues.Now, the marginal propensity to import is probably less than unity. It follows, therefore, that government borrowing must rise.If the government were bound by a law committing it to reduce the deficit, it would then have to cut spending. This would exacerbate the downturn. Which is just moronic.So, how can I say Brown’s idea is cunning?Simple. Imagine the above scenario plays out after the next election under a Tory government**. Cameron then faces a dilemma. Either he cuts government spending and deepens the downturn, in which case Labour says: “We told you so. Tory cuts are damaging the economy.” Or he repeals the law, in which case Labour says: “His talk about fiscal responsibility was just a lie. You can‘t trust the Tories.” Brown, of course, knows this. His proposed law has nothing to do with improving the public finances, or about macroeconomic management. It’s an effort to embarrass the next Tory government.To be clear: I’m not arguing here that spending cuts are unnecessary under any circumstances.* A note to Telegraph subs: please distinguish between the debt and the deficit. ** Actually, you don’t have to believe the private sector’s desired financial surplus would rise. Merely not having the surplus fall would be sufficient to keep government borrowing high.

September 25, 2009

Duncan says we should be concerned by today’s news of a collapse in capital spending because “investment is the driver of long term growth.”This sounds sensible. But it raises a problem, shown by my chart. It plots the share of business investment in GDP, measured in current prices, against annualized GDP growth over the following five years.

There’s a negative relationship between the two. High investment leads to slow growth, and low investment to high growth. This relationship suggests that today’s figures - showing the investment-GDP ratio at its lowest since records began in the mid-60s - are a reason for optimism about economic growth, not pessimism.There might be a simple reason for this. Businesses’ investment decisions are not rational. High capital spending, then, is not a sign that there are lots of growth opportunities in the economy, but that bosses are irrationally overconfident and have been swept away by the euphoria of an economic boom - a fact magnified by the fact that capital spending is excessively sensitive to current profits; firms invest because they have the cash to do so. And booms lead to busts. Similarly, low spending is an indicator not that growth opportunities are scarce but simply that animalspirits and current profitability are irrationally depressed.If this is right, today’s low investment tells us not that the economy is heading for hard times, but simply that bosses are irrational.There are, however, (at least) two counter-arguments here.1. This time is different. Current low investment isn’t due to irrational pessimism, but to firms being starved of finance by banks. 2. In looking at actual GDP growth, I’m using the wrong metric. Maybe capital spending does influence trend GDP growth, the rate at which the economy can grow without generating inflation.I’m not sure, though, if any of this actually rejects Duncan’s main point. After all, if investment is so swayed by irrational animal spirits then there might - subject to other postulates - be a case for taking it out of capitalists’ hands, as Keynes said.

September 24, 2009

The papers report that Brown's requests to meet Barack Obama one-to-one have been rebuffed. What they don't answer is the question: what was the policy issue that Brown believed could be solved only by facetime, rather than by the sort of emails and phone calls that occur all the time between Downing Street and the White House?They don't answer this because there was no such issue.Brown wants a one-on-one with Obama not because it's necessary for policy purposes, but because it's a legitimation ritual. A meeting would send the signal: "I'm a global statesman, not a mere politician like Cameron or Osborne; I'm addressing big global issues."The same is, of course, true of the upcoming G20 summit. All the substantive business this does - insofar as there is any - can be, and has been, done behind the scenes. The facetime, and the photo opportunities, are ceremonies intended to elevate the individual politicians in their own, and voters' minds. And herein lies a paradox of managerialist politics. One the one hand, politicians sell themselves like any other product: "Great public services at prices you'll like." But on the other hand, they expect - and forcefully extract - an allegiance unavailable to ordinary firms; as Alasdair MacIntyre wrote, "it is like being asked to die for the telephone company." Rituals such as G20 summits, and "bilaterials", are part of the effort to win this allegiance, to shore up a mystique of high office. The question is: can our governments continue to have it both ways, appealing both to mere instrumental rationality, whilst at the same time pretending to be something more noble and dignified?

September 23, 2009

If you want an example of how good politics makes bad (or at least indifferent) economics, the LibDems "Mansion tax" is it.I was prepared to defend this, on the grounds that it's a minor move to improve the allocative efficiency of the housing market*.The idea here is simple. £1m houses are scarce resources. Like all scarce resources, they should be owned by those that most value them. If someone can't afford the £2500 annual cost of living in a £1.5m house, they should sell up to someone who can.This idea, though, is undermined by this:

People with low incomes living in £1m properties would qualify for a rebate if they were poor enough to qualify for housing benefit...Older homeowners would also be allowed to defer payment of the tax until their death, when it would be paid from their estate. This would in effect turn it into a new inhertance tax.

These exceptions might be good politics, but they greatly weaken the ability of the tax to get houseblockers out, and so undermine its economic merits. The upshot is that the tax is neither one thing nor t'other.These loopholes mean the tax is a weak way of ensuring the scarce housing stock is used most efficiently. It's not a tax on wealth because it leaves non-housing assets untouched. This fact, plus its low rate, means it's a poor substitute for a proper inheritance tax.And on the LibDems own figures, it'll raise only £1.1bn, which is a tiny fraction of the forecast error in public borrowing, so it's barely signifcant in terms of fiscal policy.It is, then, mostly a gesture. But that's what politics is about.* I say "minor" because there are so few £1m houses. According to Land Registry (pdf), only 0.57% of the houses that sold in May were priced over £1m, and over half these were in London.The idea that the tax will touch any more than a teeny minority is a glaring example of the "middle Englanderror" - or more precisely, the middle England bare-faced lie.

For me, Norm’s criticism of Terry Eagleton’s discussion of propositions and performances just highlights why the debate between atheists and the religious is a dialogue of the deaf.Terry says: “It is a typically positivist kind of mistake to begin with the propositional.”To this, Norm replies:

Let's first take in everything about the performatives…Even then, not at the beginning but at the end, some of the propositions implied by these performatives can't be rationally defended. And for some of us that undermines the performatives. The practice of religion won't do the things for us that it does for those who believe in the implied propositions.

The thing is, Terry’s claim as it stands is surely right. There are lots of cases where belief or knowledge can only follow from performance. It is only by playing a piece of music many times that we can come to truly know it. In successful arranged marriages, the couples come to love each other only after acting like husband and wife. We can only understand a foreign culture and language by immersing ourselves in it. And there are lots of things, such as gardening or wine-making, we learn best by doing.In all these cases, performances lead us to propositions, some of which might be inarticulable. It is at least plausible that religion is another such case. A believer might say:

You can’t come to believe in God by sitting at home; He‘s just too far away from you there. It is only by going to church and experiencing the music, architecture, ritual and fellowship that we can come to even vaguely appreciate Him. God is like econometrics; propositions about him look like gobbledegook when written down, but if you practice enough, you’ll get the idea, and then - and only then! - will the propositions make sense. This is what ThomasMerton was saying in his prayer. He begins not from propositions but from ignorance, and hopes that practicing faith will lead him to God:

If I do thisyou will lead me by the right roadthough I may know nothing about it.

Now, I’m not endorsing this answer. My hunch (which is worthless) is that religious practice gives us not true knowledge but what Amartya Sen calls an “objective illusion” - a belief which, though false, looks correct from anyone looking from the viewer’s perspective. All I’m making is two points:1. There’s nothing odd about putting performance before belief. As the man said, surely correctly:

The mode of production of material life conditions the general process of social, political and intellectual life. It is not the consciousness of men that determines their existence, but their social existence that determines their consciousness.

2. Norm is perhaps asking too much when he asks someone who has gained belief through practice to justify those beliefs to one who hasn’t practiced. One reason why writing about music is like dancing about architecture is that our language struggles to cross the barrier between practitioner and non-practitioner. Perhaps believer and non-believer will always be unable to understand each other. But then, why should all knowledge and beliefs be explicit rather than tacit and so amenable to “rational” debate?

September 22, 2009

Peter Mandelson claims that we have a choice between Labour’s “progressive reform” and the Tories “ideologically-driven retrenchment and deep cuts”. Which raises the question: what impact do different governments really have upon public spending? The answer might be: less than you think. A new paper by Allen Drazen and Ari Brender has looked at changes in the composition of government spending across 12 different categories in 68 democracies between 1972 and 2003. And they’ve found something remarkable:

We find no evidence that a change in government leader results in a larger change in the composition of government expenditure in the first two years after the change relative to no change in leaders. If anything, a change in leaders is associated with less change.

Changes in leaders do affect the composition of spending over longer periods, such as four years. But even here their impact is slight: leaders explain only around one-eighth of the changes in the composition of spending that occurs anyway.So, why might governments have so little impact on spending? Here are some possibilities:1. Any party has to appeal to the median voter. If the median voter’s preferences don’t change, nor will the composition of spending.2. Spending is very hard to change. Governments have to fend off special interests and vested bureaucracies, and the brute power of the status quo.3. Spending is more sensitive to events than leaders’ ideology. Many Labourites would like to have cut military spending, for example, but this preference has been mitigated by the number of wars the government has felt compelled to fight.4. “Nixon goes to China” syndrome. It’s widely thought that only a man with Nixon’s strong anti-communist credentials could have improved the US’s relations with China so much in the 1970s; had any more left-wing president attempted to do so, he would have been decried as “soft on Reds.” In this sense, ideology can be a counter-predictor of policy. This might generalize. Maybe Labour is better equipped than Tories to cut welfare spending, as they are (wrongly?) less vulnerable to charges of being hard on the poor. Similarly, Tories might be better able to cut military spending, as they are (again, maybe wrongly) less vulnerable to charges of lacking patriotism.5. Maybe macroeconomic aggregates are just to big to detect policy changes. Here’s a challenge for you: show me some time-series data in which we might be able to clearly identify when Thatcher became Prime Minister, and when she left.If all this is right - or even nearly so - the search for dividing lines between the political parties is, for practical purposes, fruitless. What matters is not politicians’ preferences, but their opportunities. And these are often tightly constrained.

September 21, 2009

Happiness is infectious - we catch it from others. That’s the finding of this new paper. The authors find that people in Chinese villages are more likely to be happy if their fellow villagers are. Significantly, this is not simply because the things that cause their neighbours to be happy cause them to be happy. Instead, there seems a causal relationship from neighbours’ happiness to one’s own.This seems yet more evidence to suggest that peer effects matter.But it raises a puzzle. There’s abundant evidence that other people’s income makes us unhappy. So why does others’ happiness make us happy? What’s the difference between income and happiness?Yes other people’s high incomes might make us more aware of our relative poverty, though a contrast effect. Or others‘ incomes, in showing us what might have been, increase our sense of having lost opportunities. But exactly the same is true for happiness, as Hank sang:

Through tears, I watch young loversAs they go strollin' byOh all the things that might have beenGod forgive me if I cry

Offsetting this is the tendency for happier people to be friendlier and more trusting, which in turn increases others’ happiness. What’s odd is that this spill-over effect should be so powerful.